Green credit, uncertainty and corporate pollution emissions

Abstract

ABSTRACT The Chinese government introduced the green credit policy (GCP) in 2007 to address deteriorating ecological conditions. Using an enterprise-heterogeneity dynamic stochastic general equilibrium (DSGE) model that includes a financial accelerator mechanism, uncertainty shocks, and GCP, we reveal that GCP significantly reduces emissions. However, this effect is inhibited by rising external uncertainty, as evidenced by the findings from impulse response and welfare loss analyses. Additionally, this negative effect and inhibition are more pronounced for privately-owned enterprises (POEs) while muted for state-owned enterprises (SOEs). Moreover, this study presents that uncertainty weakens the role of GCP through two channels: tightening firms’ financing constraints and discouraging investment. Building upon the theoretical analysis above, we validate our findings by employing detailed firm-level data and the difference-in-differences (DID) method. The empirical results confirm the robustness of our findings. This study offers theoretical and quantitative support for developing GCP in China.